Checking in on Brick and Mortar Acquisitions of E-Commerce Retailers

The merging of brick and mortar and e-commerce retailers has been happening for years. Recently, Vera Bradley bought a 75 percent stake in Pura Vida, the online accessories company, with an option to purchase the remaining 25 percent in five years.

Robert Wallstrom, CEO of Vera Bradley, said the company “will be able to leverage Pura Vida’s expertise around digital marketing and social customer engagement, and Pura Vida will be able to leverage our product design and development, infrastructure, and back-office support capabilities.”

This is just the latest symbiotic relationship formed between e-commerce and brick-and-mortar retailers. While a number of acquisitions are designed to help brick-and-mortar companies bolster their online efforts, the digital brands frequently benefit as well.

We’ve seen a rush of acquisitions in the past couple of years that combined major e-commerce and brick-and-mortar retailers. Let’s take a look at how those wagers are paying off and what they mean for the future of retail.

PetSmart buys Chewy.com

When PetSmart bought Chewy.com for $3.35 billion in 2017, it was one of the largest acquisitions of an e-commerce company by a brick-and-mortar retailer in history.

PetSmart needed to move the needle on its lackluster online sales, and Chewy had already cornered half the market for online pet food and supplies, even beating out Amazon (which has since pulled even).

Chewy has seen success both through its 24/7 customer service model and its ability to ship to 80 percent of the U.S. overnight. It’s also been buoyed by pet owners’ shift to online purchases for heavy bags of food and convenient prescription refills. In 2017, 14 percent of pet food purchases happened online, but that number is expected to rise to 25 percent by 2022.

When Chewy debuted on the New York Stock Exchange in June 2019, it was valued at $8.8 billion, more than double what PetSmart paid for it two years earlier. According to the IPO documents, Chewy and PetSmart will “continue to coordinate purchases, giving both stronger bargaining power.”

The takeaway: If you can’t beat them, join them. PetSmart knew it would see an immediate upswing if it hitched itself to an e-commerce rocket ship rather than taking the time and resources to build out its own digital capabilities. Its investment has so far paid off, and the combined coverage of both online and in-store sales positions them for continued success in the future.

Amazon buys Whole Foods

While this bucks the trend slightly, since it’s an e-commerce retailer purchasing a brick-and-mortar grocer, it still exemplifies the strategy behind combining the two.

As Richard Kestenbaum puts it, selling groceries online is a difficult, low-margin business with a lot of consumer resistance — most shoppers prefer to pick out their own meat and produce. The Whole Foods acquisition, Kestenbaum surmises, is part of Amazon’s attempt to get to the bottom of that hang-up.

“Amazon bought Whole Foods not because it wanted to know how to operate stores. Amazon bought Whole Foods to learn about the grocery business so it could convert grocery consumers to make their purchases online,” he writes.

Derek Thompson agrees. “First, this is about food as a delivery service,” he says, but it’s also about using Whole Foods locations as distribution hubs, and ultimately creating what he calls a “life bundle,” which combines products and services like groceries, online shopping, streaming video, and more, with one company delivering them all.

The takeaway: It’s hard to tell how Amazon plans to use all the data it’s likely gaining about shopper behavior from Whole Foods. Whether that makes Amazon the de facto leader in online grocery sales or fuels something else entirely, we’ll have to wait and see what they hatch out of this one.

Walmart buys Bonobos

Walmart apparently had no intention of selling Bonobos menswear at its stores when it bought the company for $330 million. It was buying access to Andy Dunn, Bonobos’s founder and CEO, and his ideas around digital-first retail as well as his showroom concept — physical locations that Bonobos calls “guideshops.”

Initially, Bonobos loyalists balked at the deal, unhappy the brand was associating with Walmart. Online traffic to Bonobos.com fell 12 percent in the first year after the purchase.

But ultimately joining forces has been good for both brands. As current Bonobos CEO Micky Onvural put it, keeping the brands separate “lets Bonobos benefit from Walmart’s scale and resources, and it allows Walmart to learn about how digitally native brands are built.” Those lessons have served the launch of Allswell, Walmart’s online-only mattress and bedding company.

But the transformation, and the race to catch Amazon, may be taking longer than Walmart had anticipated. Walmart’s online sales increased 40 percent last year, but it’s “projecting losses of more than $1 billion for its U.S. e-commerce division this year, on revenue of between $21 billion and $22 billion.” Walmart even considered selling Bonobos, and reportedly will look to sell off some of the other online brands it has acquired.

Larger, more established companies like Walmart can learn a lot from the contemporary e-commerce brands they’ve acquired and their founders. Acquisitions aren’t always about obtaining more product to distribute, but obtaining skill sets, new ideas, and innovative leaders to keep up with the ever-changing retail landscape. While a massive ship changes course more slowly, acquiring the right talent makes sure they’re at least heading in the right direction.

How brick and mortar fills its digital gaps

How will Vera Bradley’s purchase of Pura Vida play out? Looking at three of the biggest e-commerce acquisitions of the past couple of years shows that there could be any number of outcomes.

For brick-and-mortar companies that can afford it, acquiring e-commerce brands can ensure that they have all their bases covered. It also brings top talent in house to try to replicate their success without building a new digital infrastructure from the ground up.

But the overarching takeaway is that brick-and-mortar retail and e-commerce shouldn’t be mutually exclusive. Brands need to build out multiple channels so they can reach consumers wherever they prefer to buy.

 

Copyright 2019 Metro Commercial Real Estate, LLC